The Big Sell: Biologics In Emerging Markets

As the mature markets in the United States and Europe continue to wrestle with economic and political uncertainty, drug manufacturers are hunting for new sources of growth. The US medicines market, burdened by a more powerful payer base and a protracted economic slowdown, is projected to grow at only 3 percent to 6 percent between now and 2014, and even that slow pace remains vulnerable to the potential shock of the so-called fiscal cliff. Growth in Europe will be even slower, hovering between one and four percent as the region falls back into economic recession. Policy changes in France, Germany, and the United States, combined with broader economic and budgetary pressures in Italy, the United Kingdom and—most ominously—Spain, will further slow market growth, exacerbating the effects of looming patent expiries.

All the major pharma companies are revising their growth plans and developing new ways to maintain traditionally high margins through this period of market uncertainty. At the top of the playbook is accelerating the commitment to emerging country markets, where Big Pharma has had varying levels of success—the challenge lies in transforming volume sales into sustainable profits. It is also becoming apparent that additional progress in these diverse and highly complex markets requires large investments in time, resources, and people.

Even if lower than forecast second quarter results from major players like GSK and Pfizer represent a corrective to past optimism, the headline growth rates in many emerging markets present a dramatic contrast to those in the United States, Japan and the "submerging markets" of Europe. According to data from IMS Health, drug sales in emerging markets are still growing at more than twice the global rate. China, expected to be the world's second largest pharmaceutical market by 2015, will expand at an annual rate of 22 percent to 24 percent through 2014. The other components of the BRICs—Russia, India, and Brazil—will grow at between 9 percent and 16 percent. Elsewhere, countries like Argentina, Turkey, Venezuela, Vietnam, and South Africa all exhibit substantial potential, driven by rapid economic expansion, rising incomes, and growing populations.

Pharmerging Spending and Growth

Many manufacturers have sought to get into these markets quickly, in order to leverage broad portfolios of mature brands and capitalize on the remarkable growth of the middle class. Research from the McKinsey Global Institute projects that by 2025 emerging markets will be home to more middle class households than in the developed economies. In countries like China and India, the size of emerging "middle class" populations may actually be double the population of the entire United States, a number that stirs drug marketers to flights of fantasy.

Resetting the opportunity button

The reality is more complicated, however. The vast majority of emerging market growth consists of sales of INN generic and branded generic compounds. Manufacturers have made significant efforts to extend the life cycle value of mature brands by introducing them outside their core markets, often with impressive results. Notwithstanding the relative success of this strategy, the growth potential of branded innovators remains limited, and there is a bigger question about the potential for many higher-priced innovator molecules, particularly biologics and targeted cancer compounds. Despite economic growth that has lifted hundreds of millions of Chinese from poverty, the monthly cost of a biologic cancer therapy like Avastin (bevacizumab) still exceeds the median monthly income in China. In other words, without a functioning insurance scheme that allows for reimbursement at low out-of-pocket cost, most of these products will remain beyond the reach of the average consumer.

To better understand the market potential for biologics and other high-priced innovators, we have devised a multivariate econometric model designed to isolate the factors most strongly predictive of growth. We included a variety of economic and demographic measures, health expenditure data from WHO and country governments, and sales data from IMS Health. Some modifications had to be made: for example, data were not available for every time period, and in some cases data from a different source had to be used to fill in gaps in official data sets. Taiwan (the Republic of China) is not a UN member, which means that UN agencies such as the World Health Organization do not capture data on the country. As a result, we relied on data from the Taiwanese government and assumed broad comparability of measures. To adjust for wide variation in population size, we normalized the dependent variable by converting top line sales numbers to per capita figures. Using standard statistical techniques, we modeled growth dynamics across emerging markets in Eastern Europe, Latin America, Asia, the Middle East, and Africa.